RBI’s sell-buy swaps slow rupee’s fall but push up forward premiums, making hedging costlier for foreign investors
The Reserve Bank of India is engaged in dollar sell-buy swaps to stabilize the rupee's value. However, this has resulted in higher forward premiums, making it expensive for foreign investors to hedge. As a consequence, some foreign investments in rupee-denominated assets may decline. Additionally, companies are opting to borrow in rupees and exchange for dollars due to favorable local rates.
Mumbai: The Reserve Bank of India's sell-buy swaps have slowed the rupee's decline, but have also led to a surge in forward premiums, making hedging more costly for foreign investors. Bankers believe this has unintentionally made it expensive for overseas funds to buy rupee-denominated assets due to high hedging costs, potentially discouraging some debt or portfolio inflows.
The one-year dollar-rupee forward premium has risen from 7.40% to 8.65% over the past month. Although it decreased slightly to 8.45% on Thursday, foreign investors still face high costs for hedging their local investments. The Reserve Bank of India may have shifted its focus to forward market dollar sales to help cool surging forward premiums threatening the spot rupee.
Foreign investors might find it more attractive to sell dollars forward, while hedging becomes more expensive for importers and borrowers. This could put additional pressure on the rupee, making it more challenging for the RBI to manage the currency.
Written by urgent.news from The Economic Times - Top News's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
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- RBI swaps slow rupee fall, hike premiums economictimes.indiatimes.com
